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A Manifesto for Economic Sense

More than four years after the financial crisis began, the world's major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response.

These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems.

  • The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions - other than Greece - this is false. Instead, the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.
  • The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst, many parts of the private sector slashed spending in an attempt to pay down past debts. This was a rational response on the part of individuals, but - just like the similar response of debtors in the 1930s - it has proved collectively self-defeating, because one person's spending is another person's income. The result of the spending collapse has been an economic depression that has worsened the public debt.
  • The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that's exactly what many governments are now doing.
  • The big mistake. After responding well in the first, acute phase of the economic crisis, conventional policy wisdom took a wrong turn - focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing and exacerbating the dampening effects of private-sector spending cuts.

In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy - while it should do all it can - cannot do the whole job. There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult.

How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.

The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.

But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.

Moreover past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF's study is clear - budget cuts retard recovery. And that is what is happening now - the countries with the biggest budget cuts have experienced the biggest falls in output.

For the truth is, as we can now see, that budget cuts do not inspire business confidence. Companies will only invest when they can foresee enough customers with enough income to spend. Austerity discourages investment.

So there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination.

The structural argument. A second argument against expanding demand is that output is in fact constrained on the supply side - by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand.

In the 1930s the same structural argument was used against proactive spending policies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So the problem in the 1930s, as now, was a shortage of demand not of supply.

As a result of their mistaken ideas, many Western policy-makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s, and for the following forty years or so the West enjoyed an unparalleled period of economic stability and low unemployment. It is tragic that in recent years the old ideas have again taken root. But we can no longer accept a situation where mistaken fears of higher interest rates weigh more highly with policy-makers than the horrors of mass unemployment.

Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this Manifesto to register their agreement at, and to publically argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.

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Signed By

Aaron Goldzimer - Stanford Graduate School of Business / Yale Law School
Alan Manning - London School of Economics
Alan Maynard - University of York
Alan S. Blinder - Princeton University
Alasdair Smith - University of Sussex
Alfonso Lasso de la Vega - Former Deputy Director in UNCTAD
Ali Rattansi - Professor, City University, London
Andrew Graham - Oxford University
Barbara Petrongolo - Queen Mary University and CEP (LSE)
Barbara Wolfe - University of Wisconsin-Madison
Barry Bluestone - Northeastern University
Barry Supple - University of Cambridge
Charles Wyplosz - The Graduate Institute, Geneva
Chris Pissarides - London School of Economics and Political Science
Christian Kroll - University of Bremen / Jacobs University
Christopher Allsopp - Director, Oxford Insitute for Energy Studies, Oxford
Colin Thain - University of Birmingham, UK
David Blanchflower - Dartmouth College
David Hemenway, economist - Harvard School of Public Health
David Sapsford - Edward Gonner Professor of Applied Economics (Emeritus), University of Liverpool
David Soskice - University of Oxford
David Vines - Oxford University
Demetrios Papathanasiou - The World Bank
Donald R. Davis - Columbia University, Dept. of Economics
Eric van Wincoop - University of Virginia
Erzo F.P. Luttmer - Dartmouth College
G C Harcourt - University of New South Wales, School of Economics
Gary Mongiovi - St Johns University, New York
Geoffrey M. Hodgson - Professor, University of Hertfordshire, UK
Geraint Johnes - Lancaster University
Gianni Zanini - World Bank (Consultant; former Lead Economist)
Hannes Schwandt - CEP/LSE and Universitat Pompeu Fabra
Heinz Kurz - University of Graz, Austria
J. Bradford DeLong - U.C. Berkeley
Jan-Emmanuel De Neve - University College London & LSE Centre for Economic Performance
Jeffrey Frankel - Harvard University
Jeremy Hardie - LSE Centre for Philosophy of Natural and Social Science
Joan Costa Font - London Sschool of Economics
Jocelyn Boussard - European Commission
John H Bishop - Cornell University
John Van Reenen - Centre for Economic Performance, LSE
Jonathan Portes - National Institute of Economic and Social Research
Joseph Gagnon - Peterson Institute for International Economics
Justin Wolfers - Princeton University
Kalim Siddiqui - Business School, University of Huddersfield, UK
Ken Coutts - Faculty of Economics, University of Cambridge
Kevin ORourke - University of Oxford
Larry L Duetsch - Emeritus Prof of Econ, U of Wisconsin - Parkside
Lesley Potters - European Commission
Marcus Miller - Warwick University
Mariana Mazzucato - University of Sussex
Mark Setterfield - Trinity College, Connecticut
Mark Stewart - Warwick University
Max Steuer - London School of Economics
Michael Ambrosi - Professor Emeritus, University of Trier
Michael Graff - ETH Zurich and Jacobs University Bremen
Michael Waterson - University of Warwick
Nathan Cutler - Harvard Kennedy School
Nattavudh Powdthavee - University of Melbourne and Centre for Economic Performance, London School of Economics and Political Sciences
Nicholas Rau - University College London
Olaf Storbeck - Handelsblatt - Germanys Business and Financial Daily
Oriana Bandiera - London School of Economics
P.E. - Emeritus Professor of Economics,University of Reading
Patricia Rice - University of Oxford
Paul Anand - Open University/ HERC Oxford University
Paul Gregg - Professor, Dept of Social and Policy Sciences, University of Bath
Paul Krugman - Princeton University
Peter E. Earl - University of Queensland
Peter Elias - University of Warwick
Peter J. Hammond - University of Warwick
Peter Taylor-Gooby - University of Kent
Peter Temin - MIT
Philip Arestis - University of Cambridge
Philippe Martin - sciences po (paris)
Professor Paul Whiteley - University of Essex
Professor Sir Richard Jolly - Institute of Development Studies
Raffaella Sadun - Harvard Business School
Raja Junankar - University of New South Wales, University of Western Sydney, and IZA
Raquel Fernandez - NYU
Richard J. Smith - Faculty of Economics University of Cambridge
Richard Jackman - London School of Economics
Richard Layard - LSE Centre for Economic Performance
Richard Murray - former chief economist, Swedish Agency for Public Management
Richard Parker - Harvard University
Rick van der Ploeg - University of Oxford
Robert A. Feldman - IMF and Adjunct Professor Georgetown U. (retired)
Robert H. Frank - Cornell University
Robert Haveman - University of Wisconsin-Madison
Robert Neild - Emeritus Professor,Trinity College, Cambridge
Robert Pollack - Boston University
Robert Skidelsky - Wawick University
Roger Middleton - University of Bristol
Roger Stephen Crisp - St Annes College, Oxford
Ronald Schettkat - Schumpeter School, University of Wuppertal
Sergio Rossi - Department of Economics, University of Fribourg, Switzerland
Shaun P. Hargreaves Heap - University of East Anglia
Sheila Dow - University of Stirling (emeritus position)
Simon Wren-Lewis - Oxford University
Stefan Szymanski - University of Michigan
Stephen E. Spear - Carnegie Mellon University
Stephen Gibbons - London School of Economics
Susan Himmelweit - The Open University, UK
Terry Barker - University of Cambridge
Tony Venables - University of Oxford
Victor Halberstadt - Leiden University
Wendy Carlin - UCL
William Brown - University of Cambridge
William T. Dickens - Northeastern University and The Brookings Institution


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Recent Comments

  • I am an economic historian, who studies the history of capitalism, slavery, and similar issues. All empirical and historical evidence supports this manifesto.
    Allan Kulikoff
  • We need the government to stop picking winners and losers and go back to taxing all forms of income the same. We need to stop government subsidizing of profitable companies like those in the oil and gas industry, the big agriculture companies, and the private health insurance industry, to name a few biggies. We can only afford lower taxes when we have fair taxation and government responsive to people rather than money from powerful I interest groups.
    Mark S. Krasnoff
  • Sadly, denial, ignorance and the downright egotism and masochism of leaders and other supposedly intelligent people are wrecking the lives of tens of millions. Common sense has never been in shorter supply. Thanks for putting this together
    Ewan Simpson
  • Yes, Krugman is absolutely correct in his assesment. I live in Madrid, Spain, on of the most affected countries now on radar. In the EU, Angela Merkel, Germany Prime Minister, has envoked her Austerity Plan for EU 17 Euro holding nations. Those especially from the south. THE RESULT: JOB DESTRUCTION! Unemployment is racing upward at rocketing rates. On top of that the governments are not cutting spending, but they are massively and rapidly increasing income taxes, sales taxes, municipal FINES, ENERY, etc. The Austerity measure does not work. I stand against it because it is extremely bad for business. Good medium size companies that work well and are strong are being wiped out because their bankers can no long financially support them.
    Brady Hull
  • I have written articles for this important cause, eg Demon Debt for IPPR, January 2012.
    John Cullinane
  • Maybe European economists could do a similar manifesto with a focus on the euro crisis. There might be a more urgent need for that.
    Stephane Genilloud
  • Merci pour vos propos. Comment vos "collègues" économistes ayant pignon sur média peuvent -ils mentir comme ils le font à toute la population ayant élu le PS pour tout changer.F. Hollande ne peut -il en tant que président jeter le pavé dans la mare et enfin adopter une politique réactive et claire dans notre pays et montrer la voie du bons sens contre les néolibéraux qui nous étouffent. On n'est plus dupe.Merci de vos actions éclairantes.
  • Important and obviously correct. I do consider it generous to proceed on the assumption that our economic decision makers are mistaken in their choice of medicine. I appreiciate that the manifesto covers a wide breadth of nations, but in the UK especially the choice of austerity sits nicely with our incumbants predeliction for demonising the poor and slashing public spending.
    Alexander King
  • I am not an economist but have studied all sides carefully and agree with the Manifesto.
    Craig Cooley
  • Not only do I strongly agree, but as an accountant by training,we have lost sight of a simple concept: a society needs to generate more value than it consumes if it is to save and fund its societys expectations and future liabilities. Understanding what builds realisable value in the skills of all the employable workforce, in the sustainable value of corporations and any entities including public sector service is poorly grasped. Value is destroyed by massive unemployment (see Spain in the next few years)by failure to educate, by false and bogus assertions about securities (the banking crisis)and even by changing mindsets so that demand collapses (the 1930s?). Well done this manifesto.
    Hugh Aldous
  • I am not an economist, but I can read. Perhaps perhaps,in addition to greed and the quest for power, deficits in literacy and critical thinking are the underlying problem. Ill try to help...good luck.
    William T. Brune
  • One can only agree with this manifesto and hope it is widely disseminated and heard by policy-makers. What however is missing is how to address unemployment - especially of youth - and growing social exclusion, in the EU and the US.
    Hedva Sarfati
  • Well written.
    Kat Sumner
  • This is straightforward economics 101 backed by a sea of empirical evidence. Arguments to the contrary come from ideologues, intellectual bigots and just plain stupid people who advise or otherwise have the ear of governments. Hoping for growth through austerity is akin to hoping water will flow up hill. Pure fiction.
    Geoff Poapst
  • Very clear exposure of politics and economics
    Andrei Armenean
  • I can only stress the famous caveat by George Santayana: "Those peoples that forget their History are bound to repeat it here". And here we are again, throwing away 60 years of European integration, meant to avoid the mistakes and catastrophes of the 1930s.
    Javier de la Puerta
  • The case for greater public spending as a response to the current economic situation has shown to be a better and more appropriate way to deal with the current state of the economy not only in theory (where it has been, historically, quite successful), but from a variety of actual economic data that has been compiled by a number of economists (Paul Krugman - not the only - but a good example). In addition, fiscal austerity has proved to be self defeating in many cases in which it has been thoroughly implemented; take Ireland for instance. This is a time for the government to take advantage of low rates to balance the de-leveraging process of the private sector.
    Gustavo Gomes Pereira
  • When the facts contradict the theory, change the theory. This is what the manifesto stands for, and this is how science (even social science!) should work.
    Dean L. Surkin
  • What is needed for both social and financial health is not necessarily to pay people to make things but to pay people to do things: tobe artistically creative or to provide services through NGOs, for example.
  • The only problem I see here is that we need reality based responses to much more than just our economic problems. Things like energy, climate, health care and foreign relations are all areas where current policy seems to be driven by delusion and wishful thinking coupled with a willful dismissal of fact and reality. But, I guess its best to fight one battle at a time.
    Don Richter M.S.